Will OPEC bring oil mar­kets back to bal­ance?

The Star (Kenya) - - News | Business - ALY KHAN SATCHU

This week OPEC [which was once feared and could make Western Economies quake and shake] meets in Vi­enna on Novem­ber 30. Who can for­get the glory days of OPEC when the gnome like Sheikh Ya­mani [Min­is­ter of Oil Petroleum from 1962 to 1986, and a min­is­ter in OPEC for 25 years], prayer beads in hand, would hold the global econ­omy in his thrall with his ev­ery of­ten cryp­tic pro­nounce­ments. Those were the glory go-go days which were in fact re­peated 2010-2014 be­fore the big crash which has seen Riyadh, Cara­cas, Luanda, Abuja all en­ter a tail-spin.

OPEC is seek­ing to bring the oil mar­kets back into bal­ance [the oil mar­kets have had an oil sur­plus for a num­ber of years]. In Oc­to­ber, global oil pro­duc­tion was in the or­der of 80 mil­lion bar­rels per day. Crude oil in New York closed Fri­day at $46.11 a bar­rel giv­ing a cu­mu­la­tive oil in­come of $3.608 bil­lion a day [ver­sus $8.80 bil­lion per day at the price peak of around $110.00 in 2014]. These are very big num­bers in­deed.

Ryszard Ka­puś­ciński wrote in The Shah of Shahs “Oil cre­ates the il­lu­sion of a com­pletely changed life, life with­out work, life for free. Oil is a re­source that anaes­thetises thought, blurs vi­sion, cor­rupts.” ‘’Oil kin­dles ex­tra­or­di­nary emo­tions and hopes, since oil is above all a great temp­ta­tion. It is the temp­ta­tion of ease, wealth, strength, for­tune, power. It is a filthy, foul-smelling liq­uid that squirts oblig­ingly up into the air and falls back to earth as a rustling shower of money.

To dis­cover and pos­sess the source of oil is to feel as if, af­ter wan­der­ing long un­der­ground, you have sud­denly stum­bled upon royal trea­sure. Not only do you be­come rich, but you are also vis­ited by the mys­ti­cal con­vic­tion that some higher power has looked upon you with the eye of grace and mag­nan­i­mously el­e­vated you above oth­ers, elect­ing you its fa­vorite.

Many photographs pre­serve the mo­ment when the first oil spurts from the well: peo­ple jump­ing for joy, fall­ing into each other’s arms, weep­ing.

The con­cept of oil ex­presses per­fectly the eter­nal hu­man dream of wealth achieved through lucky ac­ci­dent, through a kiss of for­tune and not by sweat, an­guish, hard work. In this sense oil is a fairy tale, and like ev­ery fairy tale, a bit of a lie. Oil fills us with such ar­ro­gance that we be­gin be­liev­ing we can eas­ily over­come such un­yield­ing ob­sta­cles as time. With oil, the last Shah used to say, I will cre­ate a sec­ond Amer­ica in a gen­er­a­tion! He never cre­ated it.

Oil, though pow­er­ful, has its de­fects. It does not re­place think­ing or wis­dom’’. Con­sider that crude oil traded above $90.00 a bar­rel from Oc­to­ber 2010 all the way though to Septem­ber 2014. From Septem­ber 2014 it em­barked upon a pre­cip­i­tous drop and traded be­low $30.00 a bar­rel in early 2016.

The big sup­ply curve ball was in fact the US which pumped an av­er­age of 9.43 mil­lion bar­rels per day in 2015, the high­est level since 1972 and +89% since 2008. OPEC’s suc­cess is de­pen­dent on dis­ci­plin­ing its own mem­bers which is a lit­tle like herd­ing cats. Then they need non-OPEC [Rus­sia, for starters] to cap their pro­duc­tion. The US and Canada are not in the con­ver­sa­tion and will in fact ramp up pro­duc­tion on any uptick in prices.

“The chal­lenge is less with OPEC and more with the outer forces we don’t con­trol,” Em­manuel Ibe Kachikwu, Nige­ria’s min­is­ter of state for petroleum, said Thurs­day in an in­ter­view in Tokyo.

“The U.S. is be­gin­ning to ramp up vol­umes again.” Once the set-piece is over if not be­fore, the mar­kets are go­ing to ap­pre­ci­ate that the salad days are long gone and that these cats who once strut­ted the global stage have had their best days and then we en­ter the sec­ond leg of the down-turn in these economies.

Rus­sia has shown it can with­stand the pain. The King­dom of Saudi Ara­bia is go­ing to have to make fur­ther painful ad­just­ments and soon stop-loss a deputy crown prince. Other cap­i­tals from Cara­cas to Luanda, from Abuja to Mus­cat are set to en­ter un­charted ter­ri­tory.

I do not see WTI trad­ing above $60.00 un­der any cir­cum­stances through 2017. Traders can sell $60.00 strike call op­tions with a 1 year ma­tu­rity [into a price rally] and pocket the pre­mium.

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